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CEBA Loan Forgiveness

I saw on the Tax Cycle training today that the loan forgiveness is taxable when the CEBA loan was received. I have conversed with several accountants and some say yes and some disagree. Does anyone know how I can confirm this with CRA directly?

You can look up “forgivable loans” on the CRA website or paragraph 12(1)(x) in the ITA, but remember that CRA isn’t the final authority with respect to the ITA. I have heard the same difference of options from various tax experts and even tax lawyers, particularly with respect to the word “received” - can you consider it “received” if the trigger event has not occurred? That is, until you know it can be forgiven, perhaps it isn’t “received”. There may be other arguments…

It is generally thought that it would be taxable in the year of repayment. However, CRA has very clear position to include in tax return in the year of receipt of loan.

Regards

Akhlaq Khokhar, CPA, CGA
AKHLAQ KHOKHAR PROFESSIONAL CORPORATION

1 Like

Thank you.

I spoke to CRA yesterday and was informed CRA had not yet determined when the forgiven amount would be taxed.

Hi, this is what I found from taxtips.ca regarding to taxation of forgivable portion of CEBA loans.

Taxation of Forgivable Loans

The CECRA and the forgivable portion of CEBA are taxable when received (ITA s. 12(1)(x)), but if and when repaid, are deductible when repaid (ITA s. 20(1)(hh)).

This means that the 25% (up to $10,000) forgivable portion of CEBA and 100% of CECRA will be taxable in 2020 . If any of the forgivable portion is repaid, because requirements were not met, then this can be deducted in the taxation year when the amount is repaid.

CRA/CPA October 26, 2020 webinar: CRA confirmed that the forgivable portion of the CEBA loan is taxable when received . Prior to this, CIBC’s Jamie Golombek indicated that CRA clarified to him that the forgivable portion of CEBA is taxable when received. See the CIBC document by Jamie Golombek et al Relief measures for business: Canada’s COVID-19 response plan (pdf), as well as this October 1, 2020 Globe and Mail article.

Taxation of Forgivable Loans

The CECRA and the forgivable portion of CEBA are taxable when received (ITA s. 12(1)(x)), but if and when repaid, are deductible when repaid (ITA s. 20(1)(hh)). This means that the 25% (up to $10,000) forgivable portion of CEBA and 100% of CECRA will be taxable in 2020.

Inducement, reimbursement, etc.

ITA s. 12(1)(x) any particular amount (other than a prescribed amount) received by the taxpayer in the year, in the course of earning income from a business or property, from

(i) a person or partnership (in this paragraph referred to as the “payer”) who pays the particular amount

    (A) in the course of earning income from a business or property,

    (B) in order to achieve a benefit or advantage for the payer or for persons with whom the payer does not deal at arm’s length, or

    (C) in circumstances where it is reasonable to conclude that the payer would not have paid the amount but for the receipt by the payer of amounts from a payer, government, municipality or public authority described in this subparagraph or in subparagraph (ii), or

(ii) a government, municipality or other public authority,

where the particular amount can reasonably be considered to have been received

(iii) as an inducement, whether as a grant, subsidy, *forgivable loan,* deduction from tax, allowance or any other form of inducement, or

(iv) as a refund, reimbursement, contribution or allowance or as assistance, whether as a grant, subsidy, *forgivable loan*, deduction from tax, allowance or any other form of assistance, in respect of

    (A) an amount included in, or deducted as, the cost of property, or

    (B) an outlay or expense,

to the extent that the particular amount

So if this must be claimed in 2020 what line number on the GIFI should it be recorded.

While an argument could be made for 8249 Expense recoveries, I would go with 8230 Other revenue.

Here is yet one more resource article to add to mix of replies above. It is my guess that initially one or more methods will be used and accepted and over time CRA will settle upon one administrative policy to be used for CEBA Loan Forgiveness.

If we consider the CEBA loan to be a “commercial debt” then this article posted by the Knowledge Bureau may apply:/

Debt Forgiveness: Procedures and Forms Updated

Posted: June 21, 2011

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In difficult times, activity concerning bankruptcies, consumer proposals and debt restructuring increases. If interest is, or would be, deductible to the debtor, then a debt is considered to be commercial in nature. When commercial debt is forgiven, the forgiven amount is given special tax treatment. CRA has recently updated two of its tax forms that deal with commercial debt.

The debt forgiveness rules are summarized by CRA on form T2154 Application of Designated Forgiven Debt Under Section 80. In essence, when a commercial debt is settled for less than its principal amount, the forgiven amount must be applied to reduce any losses that have been carried forward. Any amount remaining may be applied to reduce other amounts such as capital cost, cumulative eligible capital and adjusted cost bases of capital properties. If not designated, any unapplied forgiven amount will be included in income.

The forms that have just been updated are:

  1. T2153 Designations with Respect to Forgiven Debt Under Paragraph 80(2)1

When you as the debtor settle more than one commercial obligation at the same time, use this form to designate the order the obligations were settled under the debt forgiveness rules. If the order is not designated then CRA will make the choice for you.

  1. T2155 Alternative Treatment of Capital Gains Arising Under Section 80.03 on Settlement of Debt

When you as the debtor surrender certain capital properties you will be considered to have a capital gain from the disposition at that time. You can treat the capital gain as a forgiven amount for the purposes of the debt forgiveness rules. You have to designate the amount using this form, and file it with your income tax return for the tax year when the disposition occurred.

There are maximum amounts of designated forgiven debt allowed. Another form, T2156 Transfer Agreement for Transferer of Forgiven Debt Under Section 80.04, allows the debtor to transfer unapplied forgiven amounts to an eligible transferee, as agreed by both parties. An eligible transferee is a corporation or partnership to which the debtor is related.

These debt forgiveness rules from Section 80 of the Income Tax Act are explained in greater detail in EverGreen Explanatory Notes. The rules are complex, so please consult a tax professional for advice and guidance. Planning and preparation will improve any situation when there are difficult decisions to be made.

https://www.knowledgebureau.com/index.php/news/article/debt-forgiveness-procedures-and-forms-updated#:~:text=If%20interest%20is%2C%20or%20would,is%20given%20special%20tax%20treatment.&text=The%20debt%20forgiveness%20rules%20are,Forgiven%20Debt%20Under%20Section%2080.

Here is yet one more resource article to add to mix of replies above. It is my guess that initially one or more methods will be used and accepted and over time CRA will settle upon one administrative policy to be used for CEBA Loan Forgiveness.

This is a resource form the Canadian Tax Focus as to how and when to include income due to debt forgiveness:/

RELIEF FROM DEBT-FORGIVENESS INCLUSIONS: THE BASICS

When a taxpayer cannot service debt because of financial distress, a creditor may forgive all or a portion of the debt. The debt forgiveness may trigger an income inclusion under subsection 80(13), but a taxpayer in financial distress may not be able to pay the tax on the inclusion. The purpose of sections 61.2, 61.3, and 61.4 is to provide relief to certain taxpayers facing subsection 80(13) income inclusions.

Section 61.2 provides a reserve on a subsection 80(13) income inclusion if the debtor is an individual (other than a trust) resident in Canada. The reserve, which is claimed net of paragraph 80(15)(a) deductions, allows the subsection 80(13) income inclusion to be deferred to future years when the taxpayer earns more income. The reserve begins to decrease at a rate of 20 cents per $1 of income earned in excess of $40,000. Therefore, the income inclusion will never be taxed if the individual never earns income in excess of $40,000, or if he or she dies in a taxation year in which the reserve is still eligible to be claimed.

Section 61.3 provides an offsetting deduction to corporations resident in Canada (unless they are exempt from part I tax) that limits the income inclusion to twice the FMV of the corporation’s net assets. This offsetting deduction is aimed at ensuring that the corporation’s tax liability from the income inclusion will not exceed the FMV of its net assets. As is the case for many insolvent corporations, a net asset value of zero will result in a deduction equal to the full amount of the subsection 80(13) income inclusion. Subsection 61.3(1) (for resident corporations) and subsection 61.3(2) (for non-resident corporations) function in the same manner.

The rules in section 61.3 are subject to an anti-avoidance provision. Subsection 61.3(3) restricts the deduction when property transfers are made within the 12-month period before the end of the year if it is reasonable to conclude that the reason for the property transfer was to increase the available deduction for the year under subsection 61.3(1) or subsection 61.3(2). If subsection 61.3(3) applies, the lender and the borrower referred to in the subsection are jointly and severally liable for any tax liabilities arising from a subsection 80(13) income inclusion (subsection 160.4(1)).

While sections 61.2 and 61.3 provide relief for financially distressed Canadian-resident individuals or corporations, section 61.4 allows a reserve to be claimed on a subsection 80(13) income inclusion if the debtor is any of the following (with some exceptions): (1) a non-resident person that carried on business through a fixed place of business in Canada, (2) a corporation resident in Canada, or (3) a trust resident in Canada. The section 61.4 reserve also differs in that the subsection 80(13) income is required to be included in the corporation’s income at a minimum rate of 20 percent per year. Therefore, the income inclusion will be brought into income over a maximum five-year period.

Mike Ehinger
MNP LLP, Winnipeg
mike.ehinger@mnp.ca
Canadian Tax Focus Volume 3, Number 3, August 2013
©2013, Canadian Tax Foundation

https://www.ctf.ca/ctfweb/en/newsletters/canadian_tax_focus/2013/3/130308.aspx

Here is yet one more resource article to add to mix of replies above. It is my guess that initially one or more methods will be used and accepted and over time CRA will settle upon one administrative policy to be used for CEBA Loan Forgiveness.

This is a resource form the Tax Interpretations as to how and when to include income due to debt forgiveness:/

Search for the term " debt forgiveness rules"

Suggested GIFI Codes as follows:

For income from forgivable part:

8242 Subsidies, govt assistance

For Long term loan:

2363 Business and government loans OR

3145 Provincial and territorial government loans

Regards

Akhlaq Khokhar, CPA, CGA
AKHLAQ KHOKHAR PROFESSIONAL CORPORATION

8242 should work

There is no Long term debt or liability
We are being told that the full amount MUST be recorded as income in the year it was received DR Bank $40,000 CR Income $40,000
NO LOAN

When it is paid back it is recorded as an expense.

Saying should work doesn’t mean it will work.

Only the $10,000 as to be recorded as income on the tax return as a 12(1)(x) inducement.
Not $40,000.00

The Loan is with the Bank. Not the government.
I use 3143 Chartered bank loan.

I will wait and see if we get any T slip from CRA. To me, that would be definitive.

Not sure that CRA ever gets excited one’s choice of a GIFI code. (I’ve seen WAY too many returns produced by CPAs that simply use 4-6 codes: total assets, total liabs, total equity etc. and little detail on the I/S.)

Personally I try to strike a “reasonable” balance in choosing codes - accurate without being totally overwhelmingly granular. I’m with @Rein: 3143 (or 3140/3144 if apropos).